Managing cash flow — essentially money moving in and out of your business — can be arduous. Even though you're bringing in sales, you may not have collected on invoices, leaving you short of cash to pay your bills, and even make payroll. This is vital: payroll is not only a legal obligation, it is a promise to employees and their families that they'll receive their paychecks on time. But sometimes events can disrupt the best laid business plans and cause employers to worry about meeting payroll.
Here are some signs that can trigger payroll woes, and ways to face them:
Anticipating payroll problems
A big payment due from a customer is late. A restaurant faces a sudden spike in food costs. A job that should have been completed is delayed. When these or other unanticipated events impact the cash levels in your bank account, you still need to make payroll and pay associated taxes on time. How can you anticipate the unanticipated? You can't control the unexpected, but you can monitor cash flow to be sure you'll have the money to meet payroll.
Cash flow is the financial indicator to watch like a hawk:
- Watch your bank account. Keep your eye on what's going on daily. There are tools available to help you monitor your cash flow. For example, you can get reminders about upcoming bills so you can check whether there's cash on hand to make these payments or take action to address the shortage.
- Check your metrics. There are certain equations that financial professionals use when assessing cash flow. For example, look at the "days sales outstanding," which measures how long it takes for you to collect on receivables (the shorter the better). Your accountant can help you run the numbers.
- Forecast cash flow. This measurement projects sales and expenses, based on your prior history. Compare it to your actual cash flow to see the direction in which your company is moving. This comparison can detect changes that may be worrisome to future cash flow. The SBA offers a simple cash flow spreadsheet and there are numerous online tools for this purpose.
Prioritizing payroll obligations
Watching cash flow is a good place to start, but it is only part of the solution. Prioritize your cash outflow to help ensure there is money on hand to pay your workers, as well as the payroll taxes.
When it comes to payroll, two costs are a priority:
- Employee paychecks: Under the Fair Labor Standards Act, employers are obligated to pay employees for hours worked on regular paydays for the pay period covered. Similar state and local wage payment laws also require employers to pay employees promptly.
- Payroll taxes: These taxes fall into two categories: employer taxes and trust fund taxes (employees' income tax withholding and their share of FICA). Employers delinquent on their employment taxes (the employer share of FICA, FUTA taxes, and state unemployment taxes) are subject to interest and penalties. Owners who fail to pay trust fund taxes can be 100 percent liable for the money.
Here are other essential payments to consider:
- Utilities and rent: It can prove difficult to run your business if you have no electricity (meaning no lights or Internet access).
- Aging payables: Bills that are more than two months’ overdue can greatly lower your credit rating and make it more difficult to obtain financing.
- Suppliers and vendors: If you're a retailer, restauranteur, wholesaler, or manufacturer, you need to stock your shelves to stay in business. You may be able to work out special financing terms with these parties if you've been a good customer in the past.
Beyond these essentials, review insurance policies, some of which are mandatory (e.g., generally workers' compensation, vehicle insurance) while others may be discretionary, but highly advisable (e.g., liability insurance). Before canceling a policy, work with your agent to see whether you can improve cash flow by reducing premiums or by increasing deductibles, limiting coverage, or making other policy changes to make the coverage affordable. And if the business has credit card debt, try to pay the minimum due each month to preserve your credit rating.
Finding cash in a crunch
Owners and managers with a bank account short of the money needed to make payroll will need to find cash quickly. You may be able to avoid a future cash crunch by partnering with a reputable payroll provider, like Paychex, which offers Paychex Promise®, a subscription-based program that provides a number of payroll solutions, including:
- Payroll protection: This extends the collection of payroll funds from your business bank account by up to seven days without interruption of service or insufficient fund charges.
- Small business loan center: Get access to lending options through external lending partners so you can obtain funding for other business needs and thus be able to meet your payroll.
The failure to meet your payroll obligations can get you in serious trouble with federal, state, and/or local labor departments as well as the IRS. Look for warning signs that could jeopardize your ability to meet payroll, and take action immediately so that your employees get paid on time, the government receives employment taxes, and you stay out of trouble.